Inequality and the “miracle” of Asian growth

Changyong Rhee, chief economist at the Asian Development Bank, clearly recognizes the problem of growing inequality in Asia:

Over the past 20 years, the gap between Asia’s rich and poor has widened so that the richest 1 per cent of Asian households now account for 6 per cent to 8 per cent of expenditure. Income inequality has widened in China, India and Indonesia, the countries that have powered the region’s economic growth. Taking developing Asia as a unit, the Gini coefficient – a common measure of inequality – has increased from 39 per cent to 46 per cent. Had it only remained stable, another 240m people would have escaped poverty. . .

The abundance of labour has depressed wages. Capital has benefited disproportionately from Asia’s growth. Between the mid-1990s and the mid-2000s, labour income as a percentage of manufacturing output fell from 48 per cent to 42 per cent in China and from 37 per cent to 22 per cent in India.

But he doesn’t understand how the growing inequality might itself be a condition of the “miraculous” growth rates achieved in Asia in recent years.

What Rhee is really worried about is that government responses to inequality might upset the current economic model (much in the way that Raghuram Rajan has argued for the United States)

Widening inequality threatens the sustainability of Asian growth. A divided and unequal nation cannot prosper. Rising inequality can lead to instability and poor political choices, as governments facing populist demands opt to curry favour – for example, with inefficient subsidies on fuel or food – rather than promoting long-term sustainable growth.

Rhee really wants it both ways: he wants to safeguard “technological progress, globalisation and market-oriented reform – the main drivers of Asia’s rapid growth,” while suggesting that governments tackle inequality before it really gets out of hand.

The real miracle in Asia will not be continuing to achieve high levels of economic growth but, instead, transforming the current model of capitalist growth in order to actually solve the problem of inequality.